Travelers Beats Earnings Estimate - Analyst Blog

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The Travelers Companies Inc. ( TRV ) reported earnings of $2.13 per share in the second quarter of 2013, surpassing the Zacks Consensus Estimate of $1.58 per share. Moreover, results surged 69% from $1.23 per share in the year-ago quarter. Operating income of $816 million improved 65% in the reported quarter.

The outperformance was driven by lower catastrophe losses along with sustained improvement in underlying underwriting margins across all segments. However, the upside was partially offset by lower net investment income and lower net favorable prior-year reserve development.

Including net realized investment gains of $109 million or 28 cents per share, Travelers reported net income of $925 million or $2.41 per share, comparing favorably with net income of $499 million or $1.26 a share in the year-ago quarter.  Net income in the year-ago quarter included net realized investment gains of $4 million.

Operational Update

Net written premiums of Travelers during the quarter were $5.8 billion, down 1% year over year. The downfall stemmed from lower net written premiums in Personal Insurance.  

Net investment income of Travelers decreased 51% year over year to $687 million during the quarter, attributable to lower reinvestment rates in the fixed income portfolio and lower private equity returns in the non-fixed income portfolio.

Travelers posted underwriting gains of $281 million, rebounding from a loss of $62 million. Combined ratio improved 620 basis points year over year to 94.3% in the reported quarter. The improvement was due to higher underwriting margins and lower catastrophe losses, partially offset by lower net favorable prior-year reserve development.

Total revenue of Travelers in the quarter under review was $6.67 billion, up 5% year over year. Revenues also surpassed the Zacks Consensus Estimate of $6.33 billion.

Segment Update

Business Insurance : Net written premium increased 1% year over year to $3.07 billion in the quarter, largely driven by higher renewal rate.

Combined ratio improved 680 basis points year over year to 96.2%, mainly due to higher underwriting margins and lower catastrophe losses, partly offset by lower net favorable prior-year reserve development.

Operating income surged 60% year over year to $579 million in the second quarter of 2013, fueled by higher underwriting margins, lower catastrophe losses, gain from the settlement of a legal proceeding and benefit from the resolution of prior-year tax matters. Lower net investment income and lower net favorable prior-year reserve development weighed on the upside.

Financial, Professional & International Insurance : Net written premium in the quarter under review improved 1% year over year to $849 million, driven by better results at Bond & Financial Products.

Combined ratio deteriorated 630 basis points year over year to 86.3% in second quarter 2013, attributable to higher catastrophe losses and lower net favorable prior-year reserve development, partially offset by higher underlying underwriting margins.

Operating income declined 15% year over year to $154 million, attributable to higher catastrophe losses and lower net favorable prior-year reserve development, as well as lower net investment income. Nevertheless, the dip was partially mitigated by higher underlying underwriting margins and benefits from the resolution of prior year tax matters.

Personal Insurance : Net written premium descended 5% year over year to $1.91 billion, primarily due to lower new business volumes.

Combined ratio improved 1030 basis points year over year to 94.5% in the second quarter of 2013, largely driven by higher underwriting margins and lower catastrophe losses.

Operating income was $142 million, up from $52 million earned in the year-ago quarter. The upside was driven by lower catastrophe losses, higher underlying underwriting margins and a $5 million benefit from the resolution of prior-year tax matters. However, the improvement was partially offset by lower net investment income.

Consolidation

In an effort to strengthen its foothold in Canada, Travelers proposed the acquisition of The Dominion of Canada General Insurance Company from E-L Financial Corporation Limited for a cash consideration of $1.1 billion (C$1.125 billion). Dominion is the wholly owned subsidiary of E-L Financial. The deal will likely culminate in the fourth quarter of 2013, pending closing conditions. Travelers expects the acquisition to be slightly accretive to earnings per share in 2014.

Dividend and Share Repurchase

Travelers spent $300 million to buy back 3.6 million shares in the quarter. The company has $1.559 billion remaining under its authorization.

Additionally, the board of Travelers approved a dividend of 50 cents, payable on Sep 30, 2013 to shareholders of record as of Sep 10, 2013.

Our Take

Travelers continues with the trend of delivering positive earnings surprise. The reported quarter marked the fourth consecutive quarter of positive surprise aided by sustained improvement in underwriting results.

High retention rate, pricing gains, positive renewal rate changes, and a strong capital position are among the other positives, which will likely support Travelers growth performance going forward.

In addition, the proposed acquisition of The Dominion of Canada General Insurance Company is a testimony of Travelers' prudent investment strategy, wherein the company strives to expand in attractive and growing markets outside the United States.

Travelers' continuous share buyback strategy has a positive impact on earnings per share and bolsters shareholder value.

Travelers presently carries a Zacks Rank #3 (Hold). Among other property & casualty insurers carrying a favorable Zacks Rank #1 (Strong Buy), State Auto Financial Corp .( STFC ), ProAssurance Corp. ( PRA ) and Endurance Specialty Holdings Ltd . ( ENH ) will report their results in early August.



ENDURANCE SPLTY (ENH): Free Stock Analysis Report

STATE AUTO FINL (STFC): Free Stock Analysis Report

TRAVELERS COS (TRV): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: ENH , STFC , TRV

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